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U.S. to Order Pay Cuts at Firms That Got Most Aid

WASHINGTON — Responding to the furor over executive pay at companies bailed out with taxpayer money, the Obama administration will order the firms that received the most aid to slash compensation to their highest-paid employees, an official involved in the decision said on Wednesday.

Some executives, like the top traders at A.I.G., will face tight limits on their pay. In addition, the top-paid employees at all the affected companies will face new limits on their perks.

The plan will also change the form of the pay to align the personal interests of the executives with the longer-term financial health of the companies. For instance, the cash portion of the executives’ salaries will be slashed on average by 90 percent, and the rest will be replaced by stock that cannot be sold for years.

But while the plan would pare compensation substantially from what the highest-paid people at the companies might have received under normal circumstances, it would still permit multimillion-dollar pay packages.

In addition, it would have no direct impact on firms that did not receive government bailouts or that have already repaid loans they received from Washington. Therefore, it is unclear how much effect, if any, the plan will have on the broader issues relating to executive compensation, income inequality and the populist animosity toward Wall Street and corporate America.

The plan, which was written by Kenneth R. Feinberg, the official at the Treasury Department in charge of setting compensation for bailed-out companies, will be made public in a few days. The official who described the plan’s basic components did not disclose the particular impact on specific employees of the firms.

Wall Street is facing criticism and anger over the large year-end bonuses at many firms.

Firms like Goldman Sachs, JPMorgan Chase and Morgan Stanley received tens of billions of dollars in loans and loan guarantees from the government but because they have returned the loans, they are no longer under any pay restrictions. With the financial markets and their profits recovering after the huge government assistance program last year, the three are expected to make huge payouts this year even as unemployment continues to rise.

The administration and regulators at the Federal Reserve have been preparing new guidelines to align executive pay scales at banks with appropriate risk-taking. But the White House, which has come under attack from conservatives for giving the government what they consider too large and intrusive a role in the economy, has also made clear that it has no intention of seeking to impose any broad-based caps on executive pay.

Instead the administration is seeking to influence pay decisions through several changes in the way corporations govern themselves. The White House has proposed, for instance, giving shareholders a nonbinding vote on the pay of top executives.

It has also proposed that compensation committees of boards, as well as compensation consultants, be more independent.

Photo

Kenneth R. Feinberg, the Obama administration's pay czar, faced resistance from executives over compensation.Credit
Stephen Crowley/The New York Times

And it will propose that the companies under review divide the function of chairman and chief executive between two executives. Many of these proposals have been introduced in legislation by Senator Charles E. Schumer, Democrat of New York.

The cuts described for the seven companies that received the most assistance may present an incomplete picture because the Treasury Department has already addressed a handful of very highly paid executives. Under pressure from Mr. Feinberg, Citigroup agreed to sell its Phibro trading unit, which is headed by Andrew Hall, the trader whose pay last year was almost $100 million.

And as a result of Mr. Feinberg’s discussions, Kenneth D. Lewis, the head of Bank of America, who said he would resign by the end of the year, agreed to forgo his salary and bonus for 2009. (He will still receive a pension of $53.2 million, although Mr. Feinberg can issue an advisory opinion challenging it.).

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The plan will hit executives at some companies harder than others. At the financial products division of A.I.G., the locus of problems that plagued the insurer and forced its rescue with more than $180 billion in taxpayer assistance, no top executive will receive more than $200,000 in total compensation, and officials in that unit will not receive any other compensation, like stocks or stock options. Some bonuses previously promised will be paid in the coming year, and it is not clear how much of those will be awarded.

But at other companies, the cuts may mean less. Many executives at Bank of America and Citigroup are expected to reap multimillion-dollar pay packages.

For executives at all seven companies, new restraints will also be imposed on perks. Any executive seeking more than $25,000 in special perks — like country club memberships, private planes, limousines or company-issued cars — will have to apply to the government for permission.

The administration will also warn A.I.G. that it must fulfill a commitment it made to significantly cut the $198 million in bonuses still promised to employees in the financial products division.

A former employee of A.I.G.’s financial products unit, who left during the uproar over bonuses last March, said he did not see how the Treasury could make the new recommendations stick.

Earlier this year, he recalled, A.I.G. obtained an outside legal opinion explaining why it had to fulfill its two-year contract to pay bonuses. If the company reversed itself now, said the former employee, who asked not to be named because he no longer wanted to be associated with the company, the employees “could sue A.I.G., using A.I.G.’s own argument. They’ve painted themselves into a box.”

A report last week by the inspector general for the Troubled Asset Relief Program found that the insurance company had recovered only $19 million of the $45 million it had asked the recipients to repay from earlier bonuses.

The pay restrictions illustrate the humbling downfall of the once-proud giants, now wards of the state whose leaders’ compensation is being set by a Washington paymaster.

They also show how Washington in the last year has become increasingly powerful in setting corporate policies as more companies turned to the government for money to survive.

The compensation schedules set by Mr. Feinberg come as many other banks that received smaller but significant taxpayer assistance in the last year have been reporting huge year-end bonuses, setting off a new round of recrimination in Washington about the bailout of Wall Street.

Mary Williams Walsh contributed reporting.

A version of this article appears in print on October 22, 2009, on Page A1 of the New York edition with the headline: U.S. Will Order Pay Cuts At Firms With Bailout Aid. Order Reprints|Today's Paper|Subscribe